McAfee Isn't Insecure Anymore

May 30, 2005

By Sarah Lacy When Internet surfers want to feel safe, one of the first companies they turn to is McAfee (MFE). But for some time, investors haven't felt quite as safe -- thanks to questionable boom-time accounting, missed quarters, and a string of acquisitions that never quite panned out. In January, 2001, McAfee's board hired veteran IBM (IBM) executive George Samenuk to clean things up, and lately he appears to be doing just that, according to analysts.

Investors are suddenly finding a lot to like about the company that has spent much of the last few years in the shadow of mighty Symantec (SYMC), the No. 1 player in the security-software market by a wide margin. McAfee's stock is up 71% since Samenuk took over, closing at $28.21 on May 27.

A NICE POP. Much of that jump came after a blowout first quarter, reported on May 5. Year-over-year comparisons are tricky because McAfee spent much of 2004 selling off nonperforming or unpredictable businesses. So even though McAfee showed a 38% decrease in earnings, under generally accepted accounting principles (GAAP), pro-forma profits were $45.6 million -- more than double what analysts were expecting.

Revenues were up 36% year-over-year for the quarter, by the same pro-forma measures. What's more, Samenuk raised revenue guidance for 2005 to between $955 million and $975 million. Analysts had been expecting $947 million.

The stock got a nice pop afterwards, but many analysts think it has more upside. Standard & Poor's, for one, expects the stock to hit $32 in the next year, and Piper Jaffray (PJC) forecasts a $30 price. Goldman Sachs (GS) recently upgraded McAfee as well.

UNDERLYING GEM SHINES. Take your pick of bullish arguments: Some are just betting on security as one of the few software markets to show double-digit growth rates. Others say McAfee will benefit because Symantec will be distracted during the second half of the year integrating its proposed merger with Veritas. And some analysts say fears of Microsoft's (MSFT) entry into the antivirus-software business by yearend have been overblown.

Samenuk & Co. have made bold moves, including divesting the Magic Solutions and Sniffer Technology divisions for $46 million and $235 million, respectively. He bought back McAfee.com to bolster the consumer security division. McAfee also signed key partnerships with companies like Dell (DELL) and America Online (TWX) to include McAfee's software in their products. And Samenuk cut head count from 3,803 at its peak to 2,920 today.

Now that it has shed a lot of its dead weight, McAfee's underlying gem -- its security-software business -- is shining, as the first-quarter numbers show. But where does it go from here?

"MICROSOFT IS A ZERO." The antivirus market has two pieces of uncertainty, one working in McAfee's favor and one weighing on the stock. The first is Symantec's merger with Veritas. Symantec's share price has tumbled almost 40% since the news of the deal first leaked last December. It's a big merger between two very different companies, and many analysts have turned to McAfee as the "safe" security bet until it gets sorted out.

The other factor is Microsoft's impending entry into the antivirus arena, which has weighed on Symantec and Veritas alike. Some analysts are starting to think that may be overstated. "In terms of reputation with customers, Symantec is a nine, McAfee is a six, and Microsoft is a zero," says Gene Munster, analyst at Piper Jaffray. "So based on that, we're pretty upbeat about McAfee's chances."

No matter how the market pans out, it seems that much-maligned McAfee finally has some momentum. Lacy is a reporter for BusinessWeek Online in Silicon Valley